Business Maverick

Budget: Rand and bonds rally as local debt issuance cut – reaction from economists broadly positive

By Ed Stoddard 24 February 2021
Caption
Finance Minister Tito Mboweni prior to delivering his Budget Speech on Wednesday 24 February 2021. The minister focused on the financial implications of fighting the Covid-19 outbreak and South Africa's ballooning debt. (Photo: Leila Dougan)

The first say on Finance Minister Tito Mboweni’s budget speech would appear to be positive. The rand and South African bonds rallied, but the initial reaction from economists and analysts was supportive of the control of spending against a tough economic backdrop.

Domestic markets rallied just after Finance Minister Tito Mboweni began speaking, with the rand strengthening to around 14.40/dlr from 14.55, while bond yields dropped a few basis points. This speaks to the fact that it was not as bad as many expected – there was also a pledged cut in domestic debt issuance. That doesn’t mean that economists are popping bottles of bubbly, which are about to climb in price with an 8% hike in sin taxes. 

“It seemed like quite a jolly time in parliament during Mbowen’s speech. Granted, it was a much more positive speech than I think a lot of analysts expected – there was not a huge increase in VAT or income tax, and corporate income tax was actually lowered,” Shawn Duthie, managing director of the Africa-focused consulting firm Inyani Intelligence, told Business Maverick.

“But at the same time, it should have been much more sombre when we are faced with statistics like a R213-billion tax shortfall and expected 88.9% government debt ratio to GDP by 2025/2026.” 

Indeed, corporate taxes were shaved to 27% from 28% and the minimum threshold for personal taxes was raised. The latter is expected to provide R2.2-billion in tax relief. 

But the fuel levy and excise taxes on booze and smokes are going north. There is no new wealth tax as expected, but Mboweni said “SARS will establish a dedicated unit to improve compliance of individuals with wealth and complex financial arrangements”.

The relative tax relief outlined in the Budget was possible because Sars has collected more revenue this fiscal year than it anticipated a few months ago amid the pandemic-triggered economic meltdown. 

The mining sector, which has seen profits lifted by surging prices, is one of the standouts in this regard. And Mboweni has held firm on raising wage allocations. 

“There was no increased allocation to wages. This is important. Wages consume a very large share of South African government expenditure and very little in the way of service delivery is provided in return,” Nazmeera Moola and Peter Kent of asset manager Ninety One said in a commentary on the Budget. 

“While the average health care worker deserves a bonus from a grateful nation, many other public sector workers don’t.”

“Higher revenues and restrained expenditure left the Treasury room to cut local debt issuance by R92-billion in the coming year. This reduction in issuance is key – both as a signal to the bond market that the Treasury believes in its consolidation plan and to lower debt service costs.” 

This helps to explain why the initial reaction from the rand and bond markets was positive. Other economists also underlined this point.

“The key headline takeaway from the South African budget was a larger than anticipated reduction in local currency bond issuance. Both the rand and SA government bonds have rallied on this news, although the primary driver appears to be a shift in the government’s funding strategy, with a more sizable drawdown of existing cash balances,” said Razia Khan, chief economist Africa and Middle East at Standard Chartered Bank.

Down the road though, the government will have a lot of work to do to stabilise its overall debt level at 88.9% of GDP by 2024/25, as Mboweni pledged. Not all economists are convinced.

“This budget has a lot of PR. We will not turn at 89% debt to GDP,” said Mike Schussler of economists.co.za, noting the yawning budget deficits over the next couple of years. 

The ratings agencies will have the next say, and their view could chart the next course the rand and local bond markets take. DM/BM

 

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